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Wednesday, October 20, 2010

Oman crude futures traded will become the main benchmark for Asian markets

SINGAPORE, Oct 19 - Oman crude futures traded on the Dubai Mercantile Exchange (DME) will become the main benchmark for Asian markets of both

sour and sweet grades, says DME shareholder CME Group.

Middle East producers of sour crude have for years sought alternatives to dwindling Dubai output as a price reference for their exports to Asia Pacific, where local benchmarks have also lost the confidence of regional traders of sweet grades. Some say adopting European marker Brent may be just a temporary fix.

"If someone believes that Dated Brent can help price a national oil company's sour crude (by formula), it certainly is no stretch to suggest that Oman could be a significant component in pricing Far East sweet crude streams," CME Group's managing director of energy research and product development Bob Levin said in an email following an interview in Singapore.

"I think that Oman futures will have become more established and accepted, and then a couple of spreads trading with some of the sweets," Levin said when asked what he expected to be the main Asian crude benchmark by the end of the decade.

The development of surplus upgrading refinery capacity in Asia has raised the competitiveness of heavier and sourer grades.

The adoption of Oman as a benchmark for sweet grades would buck a trend where the less sulphurous grades have served as the markers, as in the case of North Sea Dated Brent, the benchmark for sour Urals crude, Russia's largest export stream.

A Reuters survey in August found that by 2012, Asia Pacific could have adopted European bellwether Brent to price Southeast Asian crude, as the top oil-consuming region increases imports from across the globe. This would imply abandoning entrenched but volatile local benchmarks, such as the Asia Petroleum Price Index (APPI) and Indonesia Crude Price (ICP).

"SHORT-TERM" FIX

But Brent is not as geographically relevant to East Asia as Oman crude, said Levin of the CME, the world's biggest commodities and energy exchange.

"That is a short-term reaction," said Levin, because "the combination of the number of cargoes and number of participants just may not have been sufficient for any fungible base to lead to" a regional local crude benchmark for Asia Pacific.

Another obstacle that Dated Brent faces as a marker is declining production of the four North Sea streams that make up its pricing mechanism: Brent, Forties, Oseberg and Ekofisk. The last three have been added to maintain the marker's total pool of crudes above a certain threshold.

"Just because you add other streams, if they are not close enough in value, they can be disruptive" to the integrity of the benchmark, Levin said.

Oman plans to spend $3.5 billion to boost oil output by 18 percent to 1 million barrels per day (bpd) by 2015 from 850,000 bpd, a finance ministry official said in July.

And trading of futures on the DME has increased since the contract was introduced in 2007. Still, volumes remain below the level at which producers such as Saudi Arabia, Kuwait, Iran and Iraq would switch from pricing their crude against the average of Dubai and Oman spot quotations by McGraw Hill's Platts.

The DME traded an average 3,260 contracts of Oman futures in first-half October, up 17 percent from 2,787 in the same period of 2009.

Saudi Arabia's support is crucial to the DME's success as a marker for the 12 million bpd of Gulf crude exported to Asia, Reuters estimates showed.

Producers are showing more confidence in the DME benchmark, coming around to the idea that the liquidity they hope to see may only develop after they shift their benchmark pricing, the exchange's chief executive, Thomas Leaver, said in March.

The Saudi kingdom has over the past year shown a growing disposition to change, reflected by the tone of discussion between state-run Saudi Aramco and customers and by its abrupt switch to a Gulf sour crude benchmark for all U.S. sales, traders have said.

The governments of Dubai and Oman, both stakeholders in DME, already sell crude to Asian buyers pricing it off the exchange's Oman contract. At some 900,000 bpd, this accounts for 6 percent of the Asia-bound crude from the Middle East Gulf, the DME said.

"The migration to DME Oman pricing by other national oil companies would significantly increase the liquidity of the contract as regional risk management moves to a DME Oman related basis," Leaver said in response to questions about Oman's viability as a pan-Asian benchmark.